Further gas problems in the pipeline and Truss is new PM

Liz Truss has been sworn in as Britain’s new prime minister after comfortably beating Rishi Sunak, securing 57% of the leadership contest vote among Conservative party members. There was a fairly muted market reaction to the news, perhaps partly because Truss has been a clear frontrunner in recent weeks.

One of the first priorities for the former foreign secretary will be tackling surging energy prices, with average household bills set to rise from almost £2000 to over £3,500 in October. Truss also faces a stuttering economy and industrial unrest with the Bank of England warning that the UK will fall into recession this year.

Since Boris Johnson resigned in early July there has been a significant weakening in sterling and UK government bond markets. While part of this can be attributed to broader macroeconomic themes, there is also some suggestion that the selling is partly due to the Truss’s promise of unfunded tax cuts and unorthodox regulatory views including the proposed altering of the Bank of England’s inflation mandate.

The sterling to US dollar exchange rate has fallen to the 1.15 level, down around 15% year-to-date and trading not far from its lowest level in decades. The depreciation in the pair in August was the largest monthly fall in over five years, as political uncertainty and a clearly slowing economy weigh on the currency. In the bond markets, the UK 10-year gilt yield has recently moved up to its highest level of 2022, closing last week at 2.92%.

UK large-cap benchmarks declined by around 2% last week, holding up better than most their peers in a global market sell-off with the MSCI All Country World Index falling 3.3%.

US labour market cooling

Last Friday’s US employment report showed 315,000 jobs were added in August. Although this represents a solid monthly gain it is also the lowest reading year-to-date, and the clearest sign yet that the red-hot labour market in the world’s largest economy may be starting to cool. This notion was further supported by a 20 basis point increase in the unemployment rate to 3.7% – its highest level since the March release and also the third time in five months this metric has come in higher than consensus forecasts.

The widely viewed economic data came a few days after the Bureau of Labour Statistics’ Job Openings and Labour Turnover Survey (JOLTS) showed that for July, there were nearly two job postings for every unemployed worker. US equity benchmarks dropped by 3.3% last week, taking the year-to-date decline to a little over 18%.

Stock markets have been under pressure since Fed chair Jerome Powell’s speech at the Jackson Hole symposium was widely perceived as hawkish, dismissing the chances of a dovish pivot anytime soon. Before Friday’s employment figures US government bond yields were extending their recent move higher with the two-year Treasury yield hitting its highest level in almost 15 years. The US 10-year Treasury yield rose 15bp on the week to end at 3.19%, but bond yields did pull back a little following the non-farm payrolls release.

Risk sentiment for markets has not been helped by Russia closing its Nord Stream 1 pipeline, claiming that it will not resume full function until sanctions against Moscow are lifted. There have been stoppages in recent weeks for other claimed reasons, most recently a technical fault last Friday, but the Kremlin has now explicitly acknowledged the role played by western sanctions.

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